Shari’ah Maxims Relevant to Islamic Banking

A Shari’ah maxim is a set of principles determined with precision, derived by jurists from the known rules of Shari’ah. They present an exposition of the spirit of a legal text. It is intended to facilitate the application of Shari’ah rules in diverse situations in human society.

In contracts, what counts is objective and meaning not words and form

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This is a very important maxim, because the meaning is more revealing to the intention of the parties to a contract. It is because of this contracts in Shari’ah may, shift to be something different from what they are called just because of inclusion of one condition. A condition that makes the agent pledge the Mudarabah capital to the financier, alters the Mudarabah contract from a profit/loss sharing contract to a loan contract.

Another example is that of Kafala: A guarantee (Kafala) implies coexistence of liability between guarantor and guaranteed, while a transfer (hawalah) implies in Shari’ah the discharge of principal debtor. Therefore, if a contract of hawalah is made with the condition to hold the principal debtor liable in case the transferee fails to pay, contract will be treated in Shari’ah as Kafalah (guarantee) not transfer. This shows that, though such contract is called hawalah, name was not important, what is important is the meaning.

One has to be very careful when designing a contract, about the conditions and stipulations in that agreement.

The benefit of a thing is a return for the liability for loss from that thing

This is very Important maxim which has wide application in Islamic banking, where liability means risk, a bank transaction that transfers such liabilities to the other party while the bank remain at the receiving end of profit is a violation of this rule. For example, a Mudarabah contract where the agent is asked to guarantee either capital or return is not permissible. This is because in such an arrangement the benefit which is the probable return on investment, is not going hand m hand with risk taking. Rather, risk is borne by one party.

A well known application of this rule is current accounts in Islamic banks. Because they are guaranteed by the bank, account holders are not entitled to get any return, though these funds are invested and they generate profits. This is because the bank is carrying all the liability of loss, hence the bank is entitled to all the returns.

A classical application of this rule in Shari’ah is the requirement of possession before resale. Ownership is established in the sale contract by the mere offer and acceptance. However, this ownership does not entitle the owner to resell unless he also establishes possession. The reason is that without actual receipt and acquirement of the sold goods it is possible that the liability for loss is still borne by the original owner, as the goods remain in his hands or warehouse. If the buyer makes profits, then such benefit is accruing free of liability, which is not permitted.

It is because of this a standard Murabaha contract starts with just a promise, while sale is postponed until actual possession is established by the bank

Contracts in suspense are not permitted

All exchange contracts must be definitive, categoric and validly concluded at the time of contracting. When the offer and acceptance are kept in suspense, then the contract is void from Shari’ah point of view. Mutual obligations (or binding promises) to contract in the future are also not permitted. One example of such contract in modern finance is found in the leasing contracts, where lesser offer that at the end of the contract (5 years for example) he will sell the equipment to the lessee for, say, $ 1000/- and the lessee accepting such offer. This means that a sale contract, though has been concluded, is kept in suspense for 5 years. This is not permitted. To avoid such Shari’ah complications, Islamic banks usually make transfer of ownership just an option to sell.